The Investor's Guide to Space

How to make profits that are out of this world

As cofounder of Space Angels Network, I evaluate dozens of space, aviation, clean-tech, and information-technology start-ups each year as potential investments for our members. My colleagues and I also work closely with investors who are interested in supporting nascent aerospace-related ventures.

We do so not only because we believe there’s money to be made in space; we also want to support an industry that has been dominated for far too long by government and large defense corporations. Besides, it’s just cool to play with rocket engines and satellites and brag to your friends that you own a piece of the space business.

We’re not alone, by any means. ”Super angel” investors are those who have put US $50 million or more of their personal or corporate assets into space—people like Jeff Bezos, Richard Branson, and Elon Musk. Clearly, they think it’s a sound business strategy and that entrepreneurs have a vital role to play in space, but they don’t expect to turn a profit for a decade or more. Venture capital firms, by contrast, target space investments that could pay off in five to seven years, at which point they would expect the company to be sold or go public. And angel investors look for returns within three to ten years.

Lately, with the world economy down and concern over carbon emissions and global warming up, my partners and I are frequently asked whether space is still a good investment. My answer, unequivocally, is yes. Here’s why.

The consensus in Silicon Valley, where I live and work, is that this recession, severe as it is, offers unprecedented opportunities to address our planet’s energy and environmental problems. Tom Siebel, the founder of Siebel Systems, which recently merged with Oracle Corp., speaks of the convergence of ET (energy and environment technologies) and IT (information technology) as an area ripe for investment. Our investors take a broader view by including ST (space technologies) in this equation.

For example, the global shift to carbon-free economies will require new infrastructure for monitoring emissions, and I expect terrestrial-, aerial- and space-based sensor networks to expand significantly in the next decade or two to support this effort. To improve energy efficiency, data collected by space-based sensors will be fused with accurate environmental and climate models and with smart energy management systems. Some of the key space technologies that will make this scenario possible include telecommunication satellites, GPS-based navigation and location services, and Earth imaging, observation, and sensing systems.

Where will we find the private capital to build this infrastructure? Some of it could come from new financial assets such as carbon credits accrued on regional, national, and international carbon markets. Just as the Internet boom in the late 1990s unlocked new funds that are now being invested by Bezos, Musk, and others in a new generation of rocket companies, smart carbon billionaires will likely invest in new satellite systems for improved carbon and emissions monitoring.

Another promising area for investors is in dual-use space technologies—that is, processes and devices that come out of space programs and find applications on the ground or vice versa. Good candidates include energy (solar power, fuel cells, wind power, biofuels), environmental systems (water and air purification and filtration, life-support systems), advanced materials, and medical devices and telemedicine systems.

Space-related energy and environmental technologies are a particularly good bet in these carbon-obsessed times. Aerospace engineers have long been interested in efficient power sources and climate control systems for spacecraft; many of these technologies are increasingly attractive on Earth, in the automotive, aviation, residential, and industrial sectors. It’s true that new energy technologies historically have been slow to take off, but I foresee their market adoption being substantially shortened through new government clean tech incentives in the United States and around the globe.

In the medical arena, telemedicine applications developed to remotely monitor and diagnose the health of astronauts look promising. And adapting such systems for Earth-side patients may get a boost as governments and insurance companies look for new ways to reduce health care costs and reach underserved communities and the growing population of elderly.

What about space transportation? For the next 10 years at least, I expect this sector to remain a relatively risky investment. The capital requirements are just too high, and today's significant oversupply in the global launch market is expected to continue. Even an order-of-magnitude growth in the demand for satellite information applications won’t translate into a similar increase in the number of satellite launches.

The only thing that could radically change this scenario would be a breakthrough in reusable launch vehicles. A handful of start-ups are now targeting this market, including XCOR Aerospace and Masten Space Systems, both in Mojave, Calif. Meanwhile, Bezos, Musk, and John Carmack are using money they made in Internet and software ventures essentially to self-fund their suborbital and orbital reusable launch companies. Two of these—Musk’s Space Exploration Technologies Corp. (SpaceX) and Carmack’s Armadillo Aerospace—are already far enough along to have won federal contracts.

All this interest in suborbital reusable launch vehicles has in turn kicked off a new market for space tourism. Here, the best-known operator is Richard Branson’s Virgin Galactic, funded internally by the Virgin Group. Reasonable market projections suggest that the number of space tourists could grow to as many as 20 000 annually by 2020. The U.S. government is also looking at advanced suborbital spacecraft for near-instantaneous crisis response, with the goal of delivering small units of soldiers anywhere on Earth within two hours. If the government pursues such a system, the technology could also find its way into the commercial market for transcontinental passenger and express delivery services.

Being a savvy investor in space also means being able to wade through the technical and market hype. Three technologies that have generated a lot of attention over the past two decades are space-based solar power, space elevators, and magnetically levitated (”maglev”) launching. The first would deploy large satellite platforms that would convert solar energy into electrical energy and beam it down to terrestrial receiving stations connected to the electric grid. Space elevators would use long, super strong tethers stretching from the Earth’s surface into space to place satellites and other payloads into orbit. A maglev launch would replace conventional chemical propulsion systems with linear or circular track, which would loft their payloads into space by accelerating them to near-orbital velocities using electromagnets of alternating polarity.

While pieces of these highly complex systems have been demonstrated on a small scale, none have been proven at the full system level, and substantial technical hurdles remain. So, as near-term private sector investments, space-based solar power, space elevators, and maglev launch don’t seem sound.

So that is the way I’m looking at space investments today. In the future, I expect to see the lines between space and air and oceans—in terms of technologies, markets, and perceived investor risk—becoming increasingly blurred. A decade from now, we will likely look at space, air, and oceans as a continuum of interconnected industrial, economic, and scientific activity. Space angel investors will be well positioned to support intrepid entrepreneurs who step forward to open up these ”blue-sky” commercial markets.

For some examples of some tech entrepreneurs investing in space, check out the slide show, Geeks in Space.

About the Author

Burton H. Lee knows what it takes to make it in space. As managing partner at Innovarium Ventures, adjunct faculty of entrepreneurship and innovation at Stanford's School of Engineering, and cofounder, together with Guillermo Sohnlein, of Space Angels Network, Lee evaluates space start-ups as investment opportunities. "When I tell people what I do they think that's pretty neat," he says.